Anatomy of a Market Collapse,
The Demise of Petroleum

Can you imagine a future where light sweet crude oil sells for $5.00 a barrel, with natural gas priced equivalently?  And neither are used as fuel or heating, but used exclusively as chemical feed stocks.  A future where electricity costs a tenth of a penny per kilowatt hour.  And there are no transmission wires or massive storm related power outages, because electrical energy is generated where its used.  A future where global warming and smog are only mentioned in the pages of history books.  A future with no American or British solders in the middle east, because nobody cares what happens to middle east oil.  Can you imagine that future?

In late December 2006, the author was contacted by two business men (Peter & Jeff) who wished to manufacture electrical generators, based on the Magneto-Thermodynamic generation (MTG) principle (see companion paper entitled Magneto-Thermodynamics, parts 1, 2, & 3).  Unfortunately, the parties involved were unable to reach a mutually acceptable agreement, however oil markets did react swiftly and strongly to the potential competition.  Starting on January 3rd, as the parties entered into negotiations, during one of the coldest winters in recent history, the benchmark price for light sweet crude oil suddenly dropped by nearly 16% in just 9 trading sessions, then started rising when it became apparent the parties would be unable to reach an agreement.

As the trading charts and supporting documentation (below) will illustrate, crude oil market price movements were closely correlated with events surrounding the authors unsuccessful negotiation.  This tight correlation graphically demonstrates the level of anxiety major oil market participants experience, at the prospect of competition from MTG technology.

Market dynamics:
For those readers who are unfamiliar with commodity market trading, this section is included as a short tutorial on market dynamics.

Most people understand that a market (such as crude oil) moves up or down in response to changing realities in the physical environment.  For instance political instability in a major producing nation will cause the price to rise, and conversely, large inventories in a consuming nation will cause the price to fall.  Less understood or appreciated are the actual timing and mechanisms of price fluctuation.  One might assume that market price reacts to events as they unfold, and if no prior information is available this is exactly what happens.  However, if information is available prior to the actual event, then market price reacts based on that knowledge, even though the event has yet to take place.  This may seem counter intuitive, but consider the following example.

Suppose you own 100 shares of XYZ corporation, and the CEO of XYZ corporation holds a press conference, during which he announces that sales of XYZ products are expected to decline next year.

What are you going to do?

Will you wait until next year to sell your shares in XYZ corporation, or will you sell them now?  Of course you'll sell now, because you don't want to be the last person to sell, and thereby take a loss on your investment.  In other words, the price of XYZ shares will start to drop the very moment the announcement is made (by the CEO), even though the event (decline in sales) wont take place for many months.  In economics, this is known as the "Efficient Market Theory" and is stated as follows:  "Prices fully reflect all known information".

Next, markets are NOT homogenous.  There are a few major participants, and many thousands of minor participants.  Generally, the major participants have a legitimate business interest in the commodity being traded, rather than a purely speculative interest.  For instance, a breakfast cereal manufacture has a very real interest in corn and wheat commodity market prices.  Therefore a small number of major participants might represent 80% of trading activity, while the thousands of minor participants may account for only 20% of trading activity.

Suppose a few major participants have knowledge of an event that will significantly impact market pricing at some future date.  What will happen?  Since these few major participants are, by virtue of their size, capable of creating significant price movements, market valuation will quickly change for little or no apparent cause.  And all the smaller participants will be caught off guard, wondering "what happened!!!".

To summarize:

  • Current market price reflects all known current AND future factors, that will impact valuation.
  • Market price may change suddenly and significantly with no apparent cause, based on information known only to a few major participants.
The direct evidence:
Chart 1 (below) shows trading activity on the March 2007 NYMEX crude oil contract from October 2, 2006, through February 2, 2007.

Chart 1

As can be seen, for three consecutive months (until January 3, 2007), trading activity was confined to a narrow price range, seldom trading above $65.00 or below $62.00 a barrel.  The next chart (below), is an expanded and annotated version of the last portion of chart 1.

Chart 2

Chart 2 shows the rapid and unexpected decline in crude oil prices, as the parties entered into negotiations starting on January 2, 2007.  Followed by a slower rise, starting January 17, 2007 as it became increasingly apparent the parties would not be able to reach an agreement.  These annotations clearly illustrate that fluctuations in market pricing correlate rather precisely with key events during negotiations.  And while an agreement to commercialize MTG technology would not result in immediate displacement of oil and gas as dominate energy sources.  Such is the nature of market dynamics (see section 1.1) and the potential of MTG, that major market participants reacted swiftly and decisively.

The sequence of events shown in chart 2, raises several interesting ancillary questions.  For instance, how did these major market participants obtain what was supposed to be confidential information, known only to the negotiating parties?  It would seem industrial espionage is alive and well in America, and has little regard for laws against wire tapping, or email interception.  The next question is more subtle.  How did these major market participants know that negotiations were in progress?  Apparently surveillance of the author is an ongoing endeavor.  A review of website access logs will substantiate that many of these major participants visit this website on a regular basis.

Click Here to view list of energy related visitors to this website (link opens in a new browser window).

Click Here to view list of foreign government visitors to this website (link opens in a new browser window).

One final question is deserving of contemplation.  How can these major market participants know that MTG technology will (when commercialized) have such a dramatic impact on energy markets, or for that matter, will even work?  Perhaps the best way to answer this question, is to turn it inside out.  In other words, why would these major market participants react so swiftly and decisively, without compelling evidence to support their actions?  The petroleum industry is conservatively estimated at $500,000,000,000 dollars per year (wholesale).  The industry retains some of the best scientists and engineers available at any price.  One may safely conclude these scientists and engineers have told their employers that MTG represents a very real threat to the continuing dominance of petroleum as the worlds leading energy source.

The indirect evidence:
During the authors unsuccessful negotiations, certain indirect indications of concern on the part of major market participants were also observed.  In order to make sense of these indirect indications, the reader must have an understanding of exactly where America obtains its imported oil.  Chart 3 (below) shows typical US oil imports by country of origin.

Chart 3 - courtesy US Department of Energy (DoE)

As chart 3 illustrates, nearly 50% of American imports are derived from just three producers:  Canada, Mexico, and Saudi Arabia.  These nations will suffer the largest and most immediate impact, if MTG is commercialized.  Along with these nations, we can also expect the American government to show concern, since a large segment of its revenue is derived from the (hidden) taxation of petroleum.  The table (below) shows selected website visitors, starting on January 3, 2007, and ending on January 27, 2007. A 24 day period coinciding with the negotiation period shown in Chart 2 (above).

Selected Website Visitors - January 3, 2007 through January 27, 2007
IP Address Date Website Visitor   Wed Jan 03, 12:11:37 PM   Pentagon HQDA (HQ Department of the Army)   Thu Jan 04, 02:38:55 AM   Saudi Arabian Government   Fri Jan 05, 05:34:19 AM   Canadian Customs and Revenue Service   Fri Jan 05, 11:17:18 AM   Bank of Canada   Fri Jan 05, 01:50:12 PM   Bank of Canada   Mon Jan 08, 12:18:59 AM   Saudi ISP   Mon Jan 08, 07:31:20 AM   Bank of Canada   Mon Jan 08, 01:03:24 PM   See Note 1 (below)   Wed Jan 10, 07:18:50 AM   Bank of Canada   Wed Jan 10, 10:07:22 AM   Bank of Canada   Thu Jan 11, 11:52:41 AM   Caterpillar Corp.   Fri Jan 12, 10:15:09 AM   Travelers Financial Services (Saudi Owned)   Mon Jan 15, 07:20:01 AM   United Technologies   Wed Jan 17, 02:31:23 AM   UK Military (Defence Evaluation & Research Agency)   Wed Jan 17, 05:08:31 AM   UK QinetiQ (Defence Contractor)   Wed Jan 17, 10:45:18 AM   Bank of Canada   Thu Jan 18, 04:48:38 AM   Arab Emirates - UAE   Thu Jan 18, 08:57:10 AM   Canadian Customs and Revenue Service   Thu Jan 18, 12:10:12 PM   Caterpillar Corp.   Fri Jan 19, 06:25:31 AM   Dominion Engineering, Inc. (Nuclear Power)   Fri Jan 19, 10:55:07 AM   US Army - Special Operations Command   Fri Jan 26, 07:38:25 AM   Deka Bank (Luxemburg)   Fri Jan 26, 01:14:32 PM   US Air Force (Nellis AFB Nevada)   Fri Jan 26, 02:20:17 PM   Pentagon HQDA (HQ Department of the Army)   Sat Jan 27, 04:20:18 AM   Saudi Arabian Oil Company (Aramco)   Sat Jan 27, 12:08:40 PM   Republican Association (Belarus)

Notes: 1. US Army, Tobyhanna Depot, C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance).

Please note the six visits from Bank of Canada (Canadian central bank), with the last visit on January 17.  Compare this last date with Chart 2 (above).  Also note the four visits from Saudi Arabia and Saudi owned business interests.  The heavy equipment companies (Caterpillar and United Technologies) derive a significant portion of their profits from manufacture of engines that use oil as their energy source.  The US and UK military visits also lend credence to an atmosphere of apprehension over the potential demise of oil as a strategic energy source (vis-a-vis Iraq), and as a continuing source of tax revenue.  The visit from Belarus is a bit puzzling, until one remembers that Belarus and Russia were having a serious disagreement over pipeline right-of-ways and energy pricing during this time frame.  No doubt there were other petroleum related visitors during this period, however they had the foresight to use untraceable internet IP addresses.  Finally, there was one further visit from the Bank of Canada, on February 12, 2007.  A day when the price of oil dropped by $2.00 a barrel from the previous days closing price.

To put these visitations in perspective, the reader should remember this is NOT a high profile website, and on average receives just 30 to 40 visitors per day.  All the more remarkable that it should attract so many prestigious visitors in such a short period of time.

Coincidence or Consequence:
The argument can be made that what has been presented in sections 1.2.1 & 1.2.2 (above), amounts to nothing more than mere coincidence.  And of course, that is a possibility.  Therefore we must ask, what is the probability that evidence presented herein, is just a quirk of fate?  In order to make that determination, it is necessary to assign a probability to each of the major events, outlined in sections 1.2.1 & 1.2.2.  The key events are:

  • Market falls sharply as negotiations are started.
  • Market rises slowly as negotiations fail.
  • Bank of Canada starts visiting website when market starts falling.
  • Bank of Canada stops visiting website when market starts rising.
  • One final visit from Bank of Canada on February 12, 2007 when market falls by $2.00 in a single day.
For the sake of discussion, lets assign a probability of ten to one (10:1) for each of these events.  In other words, there is a one in ten chance the NYMEX oil futures market will start falling when author enters into negotiations, and another one in ten chance the market will start rising as negotiations fail, and so on for each of the events listed above.  These are fairly conservative odds, and the reader is encouraged to make his/her own estimates as to the probability for each of these events.  Next, the mathematics of probability state the chance that any two events will happen, is the product term (multiplication) of their individual probabilities.  In other words, the probability for two events that each have a 10:1 probability is 100:1 (one chance in one hundred).  Therefore, if the probability of each event listed above is 10:1, the combined probability for all five events happening is:

10 x 10 x 10 x 10 x 10 = 100,000:1 (one chance in one hundred thousand).

If you assume one chance in fifty (50:1) for each of these five events, the probability rises to 312,500,000:1 (approximately one chance in three hundred million).

While coincidence can not be ruled out, the probability of simple happenstance is, to say the least, remote.

That Magneto-Thermodynamic generation (MTG) technology will, if commercialized, quickly displace petroleum as the dominate energy source, is no longer subject to much debate or even reasonable doubt.  The major industry participants have through their actions, revealed the future they foresee.  And the consiquences of that vision are documented herein, for all to see.  The only remaining question is how that displacement will transpire...

Can you imagine the future?

Anatomy of a Market Collapse